On January 15, 2010, the SEC Division of Corporation Finance issued new CDIs on non-GAAP financial measures. The new CDIs update and replace previous FAQs issued by the staff in 2003 (the “2003 FAQs”) and are intended to relax the Division’s policy on the use of non-GAAP financial measures. In a recent public speech, the staff of the Division of Corporation Finance indicated that it believed that some companies were interpreting the previous guidance as more restrictive than intended and were therefore excluding non-GAAP financial measures that companies believed were meaningful to investors from their periodic reports and other SEC filings. Consequently, the new CDIs were issued to clarify the staff’s expectations on the use of non-GAAP financial information, including providing guidance that:
- Eliminates the requirement that only non-GAAP financial measures used in managing the company’s business or for “other purposes” may be presented in filings. Registrants can provide any non-GAAP financial measure that they believe will be meaningful to investors and, “to the extent material” should include a statement disclosing the additional purposes, “if any,” for which the registrant’s management uses the non-GAAP financial measure.
- Eliminates certain disclosures that were required by question 8 of the 2003 FAQ, such as the manner in which management uses the non-GAAP measure to conduct or evaluate its business, the economic substance behind management’s decision to use the measure, material limitations related to the measure and how management compensates for those limitations, and why the measure is useful to investors.
- Clarifies that registrants can adjust a GAAP measure for a charge or gain even though it may be prohibited from being characterized as non-recurring, infrequent, or unusual. Item 10(e) prohibits adjusting a non-GAAP financial performance measure to eliminate or smooth items identified as non-recurring, infrequent, or unusual, when the nature of the charge or gain means that it is reasonably likely to recur within two years or there was a similar charge or gain within the prior two years. Prior guidance had stated that a registrant must meet the “burden of demonstrating the usefulness of any measure that excludes recurring items.”
- Reiterates that registrants can disclose certain non-GAAP per-share performance measures, but cannot disclose non-GAAP liquidity measures on a per-share basis.
- Clarifies that a registrant may present an adjustment “net of tax” when reconciling a non-GAAP performance measurement.
- Deletes language that discouraged using Earnings Before Interest & Taxes (EBIT) and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) as a performance measure and stated that if adjusted measures are used, then the titles should reflect that fact (e.g., Adjusted EBITDA). The guidance had previously stated that the titles should clearly identify the earnings measures being used and all adjustments.
- Confirms that presentation of financial information in “Constant Currency” is permitted and that registrants may comply with Regulation G by presenting the amounts historically and in constant currency, including describing the calculation process and the basis of presentation.
- Provides clarification of when foreign private issues can include non-GAAP financial measures in filings.